Unit 1.
Introduction to Macroeconomics
Dr. Mallika Kumar. Semester 2
SUBTOPICS FOR INTRODUCTION TO MACROECO.
1)What is Macro economics all about
2)Key Macro economic issues
3)Activities engaged in by the Macroeconomists
4)Classical & Keynesian approach to macroeconomics
Dr. Mallika Kumar. Semester 2
ECONOMICS :
as a subject all about economic problems – Ltd res & unlmtd wants,
Eco is decision science -making decisions regarding choices,
Opportunity costs of those choices & decisions.
Decisions at different levels – small & big
Dr. Mallika Kumar. Semester 2
ECONOMICS
- Two broad areas in eco- Micro and Macro
- Eco as a subject of study was earlier known as -Political economy
- Adam smith 1776 – Wealth of Nations – invisible hand*
- Great Depression 1930 changed the subject matter widely
- RAGNAR FRISCH of OSLO univ coined the terms Micro & Macro in 1933
Dr. Mallika Kumar. Semester 2
RAGNAR FRISCH
Ragnar Anton Kittil Frisch was a Norwegian
economist and the co-recipient of the first
Nobel Memorial Prize in Economic Sciences
in 1969. He is known for being one of the
founders of the discipline of econometrics,
and for coining the widely used term pair
macroeconomics/microeconomics in 1933.
Dr. Mallika Kumar. Semester 2
In 1969 Norwegian Ragnar Frisch, along with Dutch economist Jan
Tinbergen, received the first Nobel Prize for economics “for having
developed and applied dynamic models for the analysis of economic
processes.”
Frisch received his prize for his pioneering work in econometric modeling
and measurement; indeed, Frisch invented the word “econometrics” to
refer to the use of mathematical and statistical techniques to test
economic hypotheses. Frisch founded the Econometric Society in 1930.
Frisch believed that econometrics would help establish economics as a
science, but toward the end of his life he had doubts about how
econometrics was being used. “I have insisted that econometrics must
have relevance to concrete realities,” he wrote, “otherwise it degenerates
into something which is not worthy of the name econometrics, but ought
rather to be called playometrics.”
In a paper on business cycles, Frisch was the first to use the words
“microeconomics” to refer to the study of single firms and industries, and
“macroeconomics”
refer
to 2the study of the aggregate economy.
Dr. Mallikato
Kumar.
Semester
Frisch spent most of his professional life at the University of Oslo in
Macroeconomics : is the study of the structure and performance of national
economies and of the policies that governments use to try to affect economic performance.
SCOPE INCLUDES :
National Income , Output , Employment
Concept of NI Accounting & Distribution
Theory of Business Cycle
Inflation & Deflation
Eco Dev & Growth
Theory of Distribution of NI Among Its Contributors
Policies Related To Eradication Of Economic Fluctuations
Dr. Mallika Kumar. Semester 2
MACRO ECO TIMES
https://youtu.be/U56mZf1GxPI
Dr. Mallika Kumar. Semester 2
SIGNIFICANCE
Dr. Mallika Kumar. Semester 2
SIGNIFICANCE :
• Enriches knowledge about functioning of an economy
• To understand the the nature of economic fluctuations & control its severity
• Useful in solving prob of unemp, inflation , eco instability & eco growth
• Understand leverage effect in all economies in the world
• Knowledge of aggregates imp in framing micro eco laws
• Compare standard of living of various nations(NIA)
• Formulation of govt policies to promote growth & stability
Dr. Mallika Kumar. Semester 2
Macro Economics seeks to offer answer to these QUESTIONS :
What determines a nation's long-run economic growth?
What causes a nation's economic activity to fluctuate?
What causes unemployment?
What causes prices to rise?
How does being part of a global economic system affect nations' economies?
Can government policies be used to improve a nation's economic performance?
Dr. Mallika Kumar. Semester 2
KEY MACRO ECONOMIC ISSUES
1. LONG RUN ECO GROWTH – rich /poor nation -What determines growth , rate of growth, SOL
2. BUSINESS CYCLE – Different phases of business cycle –trough, recovery, peak, recession
3. INFLATION –general rise in prices – Invisible robbery(CN Vakil)-stimulate eco activity w/o inf
4. UNEMPLOYMENT –G.Dep unemp 24.9% - dev of macroeco- govt intervention to reduce unemp
5. FISCAL POLICY-Taxes & exp – deficit budget –expansionary FP during slump & contractionary FP during inf
6. MONETARY POLICY-Changing interest rates or money supply- high interest (tight), low int. rate stimulate de
7. INTERNATIONAL ECONOMY – open economies now, pattern of international trade & borrowing
to understand link among countries
Dr. Mallika Kumar. Semester 2
1. LONG RUN ECO GROWTH –
travelled in a developing country, observe the difference in living standards relative to developed
countries.
Rich nations –sustained eco growth – ave labour productivity increasing .
The rates of growth of output and, particularly, of output per worker ultimately determine whether
a nation will be rich or poor
Hence,an imp goal of macro eco is what determines growth ?
-rate of growth of output.
-rates of saving and investment
-rate at which technological change and other factors help increase lab & machine productivity
Dr. Mallika Kumar. Semester 2
Average labor productivity in the
United States, 1900-2008
Average labor productiv ity (output
per employed worker) has risen
over time, with a peak during World
War II reflecting increased wartime
pro duction. Productivity growth
was particularly strong in the 1950s
and
1960s, slowed in the 1970s, and
picked up again in the mid 1990s.
Dr. Mallika Kumar. Semester 2
2. BUSINESS CYCLE
Macroeconomists use the term
business cycle to describe short-run,
but sometimes sharp, contractions
and expansions in economic activity.
Growth
of o/p
isn't
always
smooth
but has
hills
and
valleys.
Trough : Bottom point is abnormally deep ,
it is called slump
Recovery or expansion: rise in emp, income &
consumer spending
Peak: top of bus cycle. Abnormally strong
recovery is called boom
An imp. task of macro eco is controlling
these phases of bus. Cycle.- Eco stability
Dr. Mallika Kumar. Semester 2
The downward phase of a business
cycle, during which national output
may be falling or perhaps growing only
very slowly, is called a recession. A
long lasting recession is called
depression
3)UNEMPLOYMENT
ECO FLUCTUATION – AFFECTS EMPLOYMENT
Recessions is that they usually are accompanied by an increase in
unemployment, The best-known measure of unemployment is the
unemployment rate, which is the number of unemployed divided by the
total labor force (the no. of people either working or seeking work).
G.Dep unemp 24.9% - dev of macroeco- govt intervention to reduce
unemp
Dr. Mallika Kumar. Semester 2
4. INFLATION
The percentage increase in the average level of prices over a year is called the inflation rate.
Rates of inflation may vary dramatically both over time and by country, from 1 or 2 percent
per year in low-inflation countries (such as Switzerland) to 1000°/o per year or more in
countries (such as a number of the former Soviet republics in the early 1990s
When the inflation rate reaches an extremely high level, with prices changing daily or hourly,
the economy tends to function poorly. High inflation also means that the purchasing power of
money erodes quickly.. INVISIBLE ROBBERY
Dr. Mallika Kumar. Semester 2
AGGREGATION
Macro eco focusses on national totals.
The process of summing individual economic variables to obtain
economywide totals is called aggregation.
The use of aggregation and the emphasis on aggregate quantities
such as aggregate consumption, aggregate investment, and
aggregate output are the primary factors that distinguish
macroeconomics from microeconomics.
Dr. Mallika Kumar. Semester 2
MICRO ECONOMICS & MACRO ECONOMICS
ECO MAFIA –https://youtu.be/wvwgIiP4gjY
Basic economic ideas and methods in common;
The difference between them is the level at which the economy is studied.
Dr. Mallika Kumar. Semester 2
Micro Economics
Macro Economics
1)Greek word : MIKROS, meaning small
• 1)Greek word MAKROS,meaning large
2)studies small parts or individual units• consumer ,Producer , Firm or small group of ind
firms
• 2)Study of economic system as a whole
• Aggregate-. prod,consumption,Sav & Inv, emp,economy
as a whole ( national totals)
• 3)known as Price or Value theory
• Product & factor pricing , mkt
•
•
•
•
•
• 4)Price determination & allocation of resources
• 5)Ascertain price of product & other FOP
• 6)Adam Smith to Alfred Marshall
3)Also called Aggregate economics
NI, General Price level, Emp level, level of Sav & Inv ,
Agg saving , Agg o/p, BOT, BOP
4)Determination of level of Income & emp
5)Maintain stability in gen.price level & solving various
eco prob
6)Became more popular after the publication of
J.M Keynes,’General Theory of Employment , Interest &
Money in 1936.
Dr. Mallika Kumar. Semester 2
TD
WHICH IS MORE IMP
MICRO OR MACRO ?
INOMICShttps://www.youtube.com/watch?v=nJbWj_kHCJQ
Dr. Mallika Kumar. Semester 2
WHAT MACROECONIMIST DO
1. Forecasting
2. Macroeconomic analysis
3. Basic research.
4. Data development for government, non profit
organizations, and private businesses. diffic
FAR-D
Dr. Mallika Kumar. Semester 2
1.FORECASTING
Forecast the performance of the economy difficult understanding of how the economy works is imperfect,
Impossible to take into account all the factors- eco & non eco that may affect eco trend
macroeconomist offer not single prediction but "most likely" forecast with "optimistic" and "pessimistic"
alternative scenarios.*
If exact forecasting not possible as in meteorology or cardiology but can talk about probabilities
Dr. Mallika Kumar. Semester 2
2.MACROECONOMIC ANALYSIS
Analyzing and interpreting events as they happen
Macroeconomic analysts monitor the economy and think about the
implications of current economic events.
TD – WORLD
-INDIA
Dr. Mallika Kumar. Semester 2
3. MACROECONOMIC RESEARCH- understand the structure of the economy in genera
The goal of all macroeconomic research is to
-make general statements about how the economy works
-developing economic theories and testing them empirically
How is macroeconomic research carried out?
Dr. Mallika Kumar. Semester 2
ECONOMIC THEORY.
Macroeconomic research proceeds primarily through the formulation and testing of theories.
An economic theory is a set of ideas about the economy that has been organized in a logical framework.
Most economic theories are developed in terms of an economic model,
Model- a simplified description of some aspect of the economy, usually expressed in mathematical form.
.
Dr. Mallika Kumar. Semester 2
MODEL
Model is a simplification of reality,
Consist of a group or set of eco relationships
Each group involves atleast one variable and
appears in atleast one other relationship which is part of the model
It becomes possible to determine the magnitude of endogeneous
variable from the given magnitude of exogeneous variable
Dr. Mallika Kumar. Semester 2
BASIC TERMS USED IN MACRO ECO
Variable - a qt or magnitude of qt that changes in its value over a period of time
Macro eco is the study of certain economic variables .
The value of some variables affect the value of some other variables directly or indirectly.
INDEPENDENT -The variables which affect the value of other variable
DEPENDENT -The variable whose value is determined by another indep. variable
ENDOGENEOUS VARIABLE -The value of some variable can be estimated from the given set of equations
EXOGENEOUS VARIABLE – The value of some variable is not given in the system and have to estimated from
outside system of equations
STOCK VARIABLE – Value can be estimated at any given point of time
FLOW VARIABLE – Value can be determined over a period of time
EXANTE –Estimate of the variable at the beginning of a specific period (planned anticipated & intended value)
EX-POST-Magnitude of the variable at the end of the period ( realised, actual, real value)
Dr. Mallika Kumar. Semester 2
Main steps in developing and testing an economic theory or model
Step 1. State the research question
Step 2 Make provisional assumptions
Step 3. Work out the implications of the theory.
Step 4. Conduct an empirical analysis to compare the implications of the
theory with the data.
Step 5. Evaluate the results of your comparisons.
Dr. Mallika Kumar. Semester 2
4) DATA DEVELOPMENT
Vital part of macro eco .
By govt – joint effort of skilled professionals
collected on the basis of who is expected to use the data and how.
data providers must guarantee the confidentiality of data
Dr. Mallika Kumar. Semester 2
WHY MACROECONOMISTS DISAGREE
An insight into why macroeconomists disagree can be provided by drawing the important
distinction between positive and normative analyses of economic policy.
A positive analysis of an economic policy examines the economic consequences of a policy but
doesn't address the question of whether those consequences are desirable.
A normative analysis of policy tries to determine whether a certain policy should be used.
Economists may agree on the positive analysis of a question yet disagree on the normative
part because of differences in values
Dr. Mallika Kumar. Semester 2
TO DO
Find out which Org./ institutions /
thinkthak in India does following
dev. Research , anaylsis , forecasting
Dr. Mallika Kumar. Semester 2
CLASSICAL APPROACH
ORIGIN : of the classical approach go back to the famous Scottish
economist Adam Smith published in 1776 ,his classic, The Wealth of
Nations, in which he proposed the concept of the "invisible hand."
ASSUMPTIONS : The various markets in the economy, including
financial markets, labor markets, and markets for goods and services,
must function smoothly and without impediments such as minimum
wages and interest rate ceilings.
Dr. Mallika Kumar. Semester 2
CLASSICAL APPROACH
The classical approach to macroeconomics builds on Adam Smith's basic assumptions
-people pursue their own economic self-interests and
- prices adjust reasonably quickly to achieve equilibrium in all markets.
Dr. Mallika Kumar. Semester 2
POLICY IMPLICATIONS
Normative proposition : The government should have, at most, a
limited role in the economy.
Positive proposition : government policies will be ineffective or
counterproductive at achieving their stated goals.
Dr. Mallika Kumar. Semester 2
DEPRESSION IN 1930
Dr. Mallika Kumar. Semester 2
Source : balance.com
.
THE KEYNESIAN APPROACH.
ORIGIN : The General Theory of Employment, Interest, and Money, by British
economist John Maynard Keynes, appeared in1936 ,160 years after Adam Smith's
The Wealth of Nations
In the Keynesian theory, unemployment can persist because wages and prices
don't adjust quickly enough to equalize the number of people that firms want to
employ with the number of people who want to work.
Dr. Mallika Kumar. Semester 2
POLICY IMPLICATIONS
Advocate a role for government in improving macroeconomic performance.
Solution to high unemployment was to have the government increase its purchases
of goods and services,
Newly hired workers would have more income to spend, creating another source
of demand for output that would raise employment further.
Dr. Mallika Kumar. Semester 2
The Evolution of the Classical-Keynesian Debate.
Keynesian approach dominated macroeconomic theory and policy from
World War II until about 1970.
1970s, the United States suffered from called stagflation, or stagnation plus inflation
ie both high unemployment & inflation
This weakened economists’ &policymakers' confidence in the traditional Keynesian
approach
Dr. Mallika Kumar. Semester 2
Starting in the early 1970s, a modernized classical approach enjoyed a major
resurgence among macroeconomic researchers
In the past three decades, advocates of both approaches have reworked them
extensively to repair their weaknesses.
Dr. Mallika Kumar. Semester 2
A UNIFIED APPROACH TO MACROECONOMIC
based on a single economic model, or on components or extensions of the basic model.
It draws heavily from both classical &Keynesian traditions, has the following
characteristics.
1. Individuals, firms, &the govt interact in goods, asset & labor markets.
2. Based on the analysis of individual behavior- Bottom up approach
3.Keynesians and classicals both agree that, in the long run, prices and wages fully adjust
to achieve equilibrium in the markets for goods, assets, &labor.
4. The basic model may be used with either the classical assumption that wages and prices
are flexible or the Keynesian assumption that wages and prices are slow to adjust.
Dr. Mallika Kumar. Semester 2
KEY TERMS
Aggregation
Average Labor Productivity
Closed Economy
Deflation
Economic Model
Economic Theory
Empirical Analysis
Equilibrium
Fiscal Policy
Inflation
Invisible Hand
Macroeconomics
Monetary Policy
Normative Analysis
Open Economy
Positive Analysis
Stagflation
Trade Deficit
Trade Surplus
Unemployment
National Income
Exports
Imports
MP
FP
Macro eco
diff. b/w micro & macro
Significance
Real example
Current issue – covid
Key issue
Activity
Classical
Keynesian
Authors
Central prob
Business cycle
Opportunity cost
Great depression
Leverage impac t
Dr. Mallika Kumar. Semester 2
Free rider
Growth
Stability
Invisible robbery
Thinktank
Millennials
PRODUCTIVITY
NORMATIVE
Questions
1. What steps are involved in developing and testing an economic theory or model? What are the criteria
for a useful theory or model?
2. Might two economists agree about the effects of a particular economic policy but disagree about the
desirability of implementing the policy? Explain your answer.
3. Compare the classical and Keynesian views on the speed of wage and price adjustment. What are the
important consequences of the differences in their views?
4. What was stagflation, and when did it occur? How did it change economists' views about macroeco.?
5. Which of the following statements are positive in nature and which are normative?
a) -A tax cut will raise interest rates.
b) -A reduction in the payroll tax would primarily benefit poor and middle-class workers.
c) -Payroll taxes are too high.
d) - A cut in the payroll tax would improve the President's popularity ratings.
e) -Payroll taxes should not be cut unless capital gains taxes are cut also.
Dr. Mallika Kumar. Semester 2
For internal circulation
Source :
Macro economics by Abel, Bernanke and Croushore: Chapters 1
Economics times
You tube
Inomics
Eco Mafia
Balance.com
Dr. Mallika Kumar. Semester 2